What is gratuity and how it is calculated?
Gratuity is the form of gratitude provided to employees in monetary terms for services rendered to the company. It is the important form of social security benefit provided as per Gratuity Act. Employees would get benefitted through Gratuity when they stay longer period in a company. In this article I would detail about what is gratuity, who is eligble for gratuity payment, how it is computed and how gratuity is taxed.
Who is eligible for gratuity payment?
An employee is eligible for gratuity, if he/she has completed 5 years of complete service with the company. However in case an employee expires, this 5 years is relaxed and he would be paid for every 1 year completed service. Please note that company need to have at least 10 employees so that they can pay gratuity to eligible employees.
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When is gratuity payable or paid?
Eligible employees would be paid gratuity in case of resignation, retirement or superannuation or death.
How Gratuity is computed?
Gratuity is paid for 15 days of every completed year of employment after 5 years of service. If you have worked for more than 6 months in a year, it would be treated as 1 completed year. Means if you worked for 5 years 6 months, you are eligible for 6 years gratuity. However if you worked for 5 years 5 months, you are eligible only for 5 years gratuity. Below is the method of computation
- Gratuity paid for 15 days for every completed year of service
- Your last drawn basic salary + DA will only be considered for computation
- Number of working days would be considered as 26.
15 days x no. of years completed
Gratuity payable = ——————————————-
26 (working days)
e.g. if you have basic salary + DA as ₹ 40,000 per month and you worked for 5 years 6 months which is equivalent to 6 years. Below is the computation of gratuity.
15 x ₹ 40,000 x 6 (years)
Gratuity = ——————————– = ₹ 138,641
26
Tax treatment for gratuity income
For the purpose of gratuity taxation, employees are divided into 3 categories. Govt employees, other employees who are covered under payment of gratuity act and other employees who are not covered under payment of gratuity act.
a) Govt employees: Gratuity is fully exempted from tax for all Government employees.
b) Other employees who are covered under payment of gratuity act: Least of the following is exempted from income tax
- 15 days of salary for every completed year of service (Including part there-of)
- ₹ 10 Lakhs
- Actual gratuity received
Illustration: An individual who has ₹ 40,000 as basic + DA per month and who has finished 5 years and 6 months would get gratuity ₹ 40,000 x 6 x 15/26 = ₹ 138,641
c) Other employees who are NOT covered under payment of gratuity act: Least of the following is exempted from income tax
- Half month average salary for every completed year of service (average salary is arrived for the basic salary+ DA received in the last 10 months). Part of the year would be ignored
- ₹ 10 Lakhs
- Actual gratuity received
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Illustration: An individual who has ₹ 40,000 as basic + DA per month in the last 10 months and who has finished 5 years and 6 months would get gratuity ₹ 40,000 x 5 x 15/26 = ₹ 115,384
In case an employee has claimed gratuity exemption earlier, the amount would be reduced from current amount and maximum eligible exemption would be ₹ 10 Lakhs only.
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Suresh
What is gratuity and how it is calculated
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103 comments
Add a comment ↓Is Graduaty based on net Hand cash salary or basic salary?
It is based on basic salary.
basic plus DA
Dear Sir,
My package is 21000/- per month how can i calculate gratuity per month ..
Hi Ravi, Please confirm if basic salary is calculated for montly/Annual basis?
for example if a monthly basic salary of an assoicate is 7000, Should we consider 84000 while calculating?
We should calculate on monthly basis
Dear Sir,
My salary is 65,000/- in addition further Rs. 5,000/- also paid monthly as a special allowance. Kindly let me know when computing service gratuity which amount can be taken as my monthly earnings. Is it Rs. 65,000/- OR Rs. 70,000/-
Thanking you
Hi Ravi, Gratuity is computed based basic salary + DA. Is your 65K is only basic + DA. If yes, it would be on Rs 65K. If your salary of 65K includes all other allowances too like HRA, Medical etc., you need to exclude them too
Thank you sir
Hello,
As you said its a gratitude towards employee, is it fine to put gratuity component in salary breakup and deducting gratuity amount everymonth, and when any employee will complete 5 years then only he will be entitled to get his own (total gratuity amount which got deducted) money, or the employee who has not completed 5years has to leave his gratuity amount which got deducted evey month from his salary, please explain. how come it can consider as gratitude.
HI sir how we know private school or company its under act of gratuity
I joined 22nd nov.2011& resign 21 april2017 leave company 21sunday may 2017 clearance no dues on 22 may 2017 i eligible.for five year or 6 year gratuaty.
My wife worked as a primary school teacher fro 1st June 2011 to 30th April 2017 at a reputed school in Pune. The contract was renewed every year. However, there was no break in service, and she recd continuous salary for all the months she worked in the school.
When she went to collect her dues, she was denied the gratuity stating the first 2 years she worked voluntarily, and is hence not eligible to receive Gratyity.
This is pure injustice, and against the Gratuity Act, which clearly states that each employee is eligible to get Gratuity after 5 years of continuous service.
Since she has put in 5 years 11 months of service, she MUST receive Gratuity as per ACT. Please let me know if I am right!
Please clarify. I worked for company for 7 years 3 months. My basic is Rs.36500. I served for 20 days in my last month of job for which they paid basic of 23548 in my last month. Now does the Gratuity computed on the Rs 36500 or on 23548.
It would be calculated on 36500
Sir,
I pay my employee a lump sum of Rs.35,000/- as take home salary.He is in service for 27yrs.How do I calculate gratuity payable.
Kindly suggest.
Regards
hello,
My employer has a different structure to calculate the gratuity. As per normal norms of a mandatory 5years completion, my employer considers gratuity from 3rd year onwards. It says "After 3rd year @15days for 3rd year, @22 days for 4th year , @30 days for =or>5years" in my CTC structure to calculate the gratuity. Here are my questions:
1. Say, i leave my job in 4th year (4 years 1 month) how will the "15/26 " component in gratuity calculation restructure itself?
2. as i understand, 15 is the number of days of last BASIC+DA and 26 is the number of days in a month (30 -4 paid working days), is this structure same for all the employees? What if i have a 5 day a week structure i.e saturdays and sundays off, will the 26 evaluate to 22 (30 – 8 paid days)?
3. I dont have a DA component, what should i add to my basic? Is it the Basic+HRA+special_allowance ? or just the Basic ?
Regards,
Shubham